Beijing has brutal but effective way to deal with moral hazard
- In the United States, policymakers no longer fret about the moral problem of corporate irresponsibility and unaccountability; they now inadvertently encourage them
Last week, Chinese police detained HNA’s founder and former chairman Chen Feng, and former chief executive Adam Tan Xiangdong. This followed a top-to-bottom restructuring of the conglomerate after bankruptcy proceedings.
In 2018, former Anbang chairman Wu Xiaohui was jailed for 18 years for fraud and embezzlement after the insurance giant was restructured and renamed Dajia.
But no recent corporate punishment quite matches that of Lai Xiaomin, the former chairman of Huarong Asset Management, at the start of this year. The country’s largest bad-debt manager eventually received a state bailout, but Lai was sentenced to death for bribery amounting to US$277 million over 10 years.
It came at a time when China had been trying to disassociate capital punishment from corporate crimes.
Given such recent developments, Evergrande founder and chairman Hui Ka-yan must feel like being hung on tenterhooks, now that the giant developer’s debt crisis has roiled global markets and kept Beijing on its toes.
Both China and the United States have made a habit of bailing out or restructuring “too big to fail” firms. But the different ways in which they deal with what economists call “moral hazard” offer interesting insights into their cultural and economic differences.
I don’t know if one is better or more effective than the other, though there is satisfaction to watch some very rich and arrogant people being brought low. You are much more likely to see that in China than in the US nowadays.
For much of my overly long and perhaps fruitless career as a journalist, I remember reporting how Western economists and central bankers had always warned against moral hazard in corporate bailouts, especially by governments. Their moral indignation and intellectual superiority – long practised against economically depressed Japan, including its unconventional monetary policies (the type now being practised in the US) – reached a crescendo during the Asian financial crisis.
You may remember how some local expatriate commentators wrote with contempt about the Hong Kong government’s interventions in the stock and currency markets in 1998.
When Asian governments complained that the assistance offered by the International Monetary Fund (IMF) came with conditions that would seriously hurt their peoples, many Western critics claimed (1) the countries deserved the pain and (2) a ritual cleansing was necessary.
A few economists, though, such as the American Jeffrey Sachs, did point out the obvious injustice and dangers of IMF conditionalities. (Interestingly, the IMF has criticised and reversed itself since the last global financial crisis on conditionalities because those needing bailouts were mostly developed US and European economies.)
I will quote Charles Kindleberger’s Manias, Panics and Crashes: A History of Financial Crises: “In the crisis of East Asia, starting in Thailand in 1997, the IMF undertook last-resort lending but insisted on orthodox measures by the country such as budget balancing and raising interest rates.
“A number of economists, notably Jeffrey Sachs ... objected to the deflationary measures on the grounds that they caused unemployment which fell largely on the poor, when the troubles had been set in motion by comfortable officials and well-to-do bankers.”
And of course, some of the most vocal critics of profligate and irresponsible East Asia, such as former US Fed chairman Ben Bernanke, ended up flooding the markets with liquidity after the 2007-08 real estate market collapse in the US, as they have been doing again with the Covid-19 pandemic. Budget balancing and raising interest rates (and borrowing costs)? You must be joking.
And that’s why ever since, world capital markets have been flooded with cheap money, resulting in bubbles everywhere, especially with unaffordable property; and those with assets, especially billionaires, get even richer while those without assets, the poor, live from pay cheque to pay cheque, if not on the street.
That has been the great Western moral hazard. Every time there is a crisis, political, economic, medical or what not, that could collapse asset prices, you can bet on the US Fed coming to the rescue.
In my copy of Kinidleberger’s book, which went through four editions from 1978 to 2000, there are long chapters and discussions on the wisdom and viability of moral hazard and “letting it burn out”, that is, letting a crisis extinguish itself. Nowadays, though, I rarely read or see such discussions in the mainstream Western media; or if they are discussed, it’s mostly justifying the need to risk moral hazard for the greater good of the economy.
As it has been often observed, no top executive in the US was jailed after the Great Recession, unlike the collapse of Enron in 2001 and the savings and loans financial scandal in the 1980s, where dozens of top executives ended up in jail.
In the US, most cases of corporate malfeasance are now punished with fines, which can be very heavy, rather than going after individual executives. So, ultimately, shareholders end up paying the fines.
Interestingly, it’s been estimated that tiny Iceland, with a population of fewer than 370,000, has jailed 36 bankers for a total of 96 years, all of them linked to the collapse of its banking system following the 2008 crash.
Admittedly, some Chinese corporate giants are among the most corrupt and profligate in debt-binging in the world. But when the music stops, their founders and top bosses often have to go down with the ship.
This is sometimes attributed to President Xi Jinping’s anti-corruption campaign, which critics consider little more than a power grab or score settling.
I see it more as a return to the ancient dynastic practice whereby an emperor would execute even his most senior mandarins for real or perceived misdeeds. Sometimes the people even cheered if the guy was corrupt or evil enough.